Editor’s note: This story appears in the February 2016 edition of North Carolina Lawyer.

By Russell Rawlings

The North Carolina State Bar and LegalZoom.com Inc. took a giant step toward resolving their longstanding differences when the parties signed a consent judgment on Oct. 22, 2015. The highly publicized agreement gave the State Bar consumer protections that it was seeking while clarifying LegalZoom’s right to provide documents to North Carolina citizens via the Internet.

The matter, however, is far from over. The agreement calls for a legislative resolution regarding Chapter 84 and the definition of the practice of law. The State Bar and LegalZoom have two years in which to attain this solution in the General Assembly.

Efforts to secure passage of House Bill 436, which would fulfill the requirements of the agreement, fell short in the previous legislative session. The bill passed the Senate by a vote of 40-3 but stalled in the House, where it remained at the close of session in the Judiciary I Committee.

The North Carolina Bar Association is seeking input from its members, particularly the sections, as it formulates its lobbying strategy for the 2016 short session. (Send comments to NCBA Director of Governmental Affairs Kim Crouch at kcrouch@ncbar.org.)

The Legislative Advisory Committee will meet on Feb. 15, and the Association has written section leaders seeking their input. The committee’s recommendations will be considered by the NCBA Board of Governors when it convenes April 15-16 in Wrightsville Beach.

Although it has not been involved in the litigation, the NCBA has long been engaged in the discussion regarding the delivery of legal services in North Carolina and, more specifically, the State Bar-LegalZoom matter.

In December 2014 the Professionalism Committee’s annual continuing legal education program focused attention on the future of the profession in the Internet era. And in May of last year, the N.C. Bar Center hosted the Convocation on the Future of the Delivery of Legal Services in North Carolina, which was convened by Chief Justice Mark Martin. More than 150 NCBA leaders participated in the convocation, which included presentations from national experts and open discussion among bar leaders.

Last summer, when the State Bar and LegalZoom resumed their efforts to resolve their litigation through the passage of House Bill 436, the NCBA invited comments from all of its sections. This included the Real Property Section, which was the only NCBA section to formally oppose the legislation.

The Legislative Advisory Committee considered the Real Property Section’s opposition before ultimately recommending that the NCBA support the legislation. The recommendation was then forwarded to the Executive Committee of the NCBA Board of Governors and adopted.

Association leadership supported House Bill 436 in large part because it provided consumer protections that are not present in many other states where LegalZoom operates.

“The Internet has presented new challenges to our system of protecting consumers from the unauthorized practice of law,” President Shelby Benton stated in a letter to the membership. “Since the 1930s, the North Carolina State Bar has had the responsibility of authorizing and regulating the practice of law.

“Needless to say, Chapter 84 was not drafted with the Internet in mind.”

Therein lays the crux of this discussion: the Internet. Accessibility and affordability have increased, but so have the risks, leading some legal professionals to question whether the protections agreed upon thus far are enough.

State Bar Perspective: Mark Merritt

Speaking on behalf of the State Bar, President-Elect Mark Merritt said House Bill 436 is in the best interest of North Carolina citizens because it provides them with important consumer protections. These protections, he said, include:

Requiring an attorney licensed to practice law in the state of North Carolina review each blank template offered to North Carolina consumers;

Requiring the legal service providers on the Internet to keep the name and address of each reviewing attorney on file and that it be provided to the consumer upon request;

Requiring the provider to communicate to consumers that the forms or templates are not a substitute for the advice or service of an attorney;

Preventing a provider from disclaiming any warranties or liabilities and limiting the recovery of damages or other remedies by the consumers which, he added, is something that a lot of these online service providers were doing; and

Preventing a provider from requiring the consumer to agree to any jurisdiction in any state other than the state of North Carolina for the resolution of disputes that may occur.

“In our view those are all very important and helpful consumer protections,” Merritt said, “because they let the consumer know what they’re getting and they protect the consumer in the event that there’s a problem with the legal form that’s provided. Our view is that this was a good piece of legislation that protects consumers.”

Access to justice is another reason the State Bar supports the legislation, Merritt said.

“This is one of the issues we have in North Carolina that many states are facing,” Merritt said, “and which has really been the discussion at the national level at the ABA and among the chief justices of various state supreme courts. We have access to justice problems with the cost of legal services and in some areas it is just a lack of availability of lawyers.

“Given those realities, people are turning to self-help measures, and technology is going to help people meet those needs. We think it’s not appropriate for lawyers to be seen as blocking access to technologies that help people avail themselves of their legal rights.”

Merritt cited the North Carolina Commission on the Administration of Law and Justice and its Technology Committee as an example of how technology is being viewed as a possible solution to the access to justice gap.

“We’re going to continue to work hard to get this bill passed,” Merritt said. “We know there are people who have concerns about it. We’re willing to go any place and meet anybody to discuss their concerns and to share our thoughts and the process that led to where we are today.

“We think when people understand the big picture they’ll appreciate how this bill really accomplishes a lot for consumers in North Carolina and helps protect the public.”

Whereas the State Bar is not looking for additional tweaks to the legislation, Merritt said, it is not opposed to looking at suggestions that might improve it. The key, he added, is clarity.

“I’m not going to say we’ll never consider changing it,” Merritt said, “but certainly if there are ways we could provide greater clarity or improve the language of it, we would certainly consider that. One of the things that is really important for the State Bar as regulator is to have clarity.

“We want statutes and regulations that don’t leave in doubt the scope of our authority, because we always want to act well within our statutory bounds and our regulatory bounds. One of the things that the statute provides is clarity, because at the time the definition of law statute was passed in North Carolina over 50 years ago, the current level of communication and access to information that we have today was nonexistent.”

Regulatory issues related to the Internet, including advertising and cloud-based storage, are not new to the State Bar and its Ethics Committee. But these issues took on greater visibility, Merritt said, when LegalZoom sued the State Bar.

“That issue obviously put more on the front burner the statutory issues under Chapter 84 with respect to what is and what isn’t the practice of law,” Merritt said. “We were in litigation over that issue for four years without resolution.

“We got strong encouragement from legislators to try and reach a compromise with LegalZoom that was protective of North Carolina citizens but also enabled citizens to have greater access to legal resources. These things just played out over time.”

Throughout these discussions, Merritt said, the State Bar’s job has always been to protect the public and act in the public interest, irrespective of the financial interests of attorneys. Long before the Internet, he added, legal forms have been available and instructions on how to fill them out have never been considered the practice of law.

“What we’re talking about here is a matter of degree,” Merritt said. “North Carolina has always had a scrivener’s exception, where scriveners can fill out forms without that being considered the practice of law. The question that is raised by the online legal service providers, which is sort of a step beyond a scrivener or a form, is obviously one that was hotly contested in the litigation and one that we didn’t get a definitive result out of the court case.”

“The case,” Merritt added, “hasn’t been made to me in a way that I found convincing that online Internet service providers are going to have the effects on lawyers that some lawyers are articulating. Every clerk of court in North Carolina provides forms. A lot of these issues relate to where lines are drawn and where it’s appropriate to draw the lines under the existing statutory framework.”

The statutes, Merritt reminded, are not set in stone.

“If it turns out in the future that there are all kinds of issues associated with online legal service providers and harm to the public,” Merritt said, “the General Assembly always has the right to revisit these issues.

“Some of the legislators’ viewpoint was that we want to see specific examples of the harm we’re preventing if we prohibit these people. I don’t think the General Assembly is dismissive at all of concerns about consumer protections, I just think there is a belief now in the General Assembly that greater access to resources is better for citizens of North Carolina.”

The State Bar, Merritt said, weighed a multitude of factors before reaching its decision to enter into the consent agreement with LegalZoom. The State Bar Council, which represents lawyers from throughout the state, approved entering into the consent judgment with LegalZoom.

“It is important for people to understand that these decisions are not made in some sort of vacuum,” Merritt concluded. “There are competing considerations at work in these kinds of decisions that are really important. We tried to balance them thoughtfully and appropriately and we’re confident that we’ve done that.”

Real Property Section: Scott Schaaf

Among the NCBA’s Sections and Divisions, the Real Property Section has provided the most extensive opposition to House Bill 436 and the NCBA’s support thereof. The section is currently drafting an alternative proposal that its chair, Scott Schaaf, says will provide more protections for consumers who are using LegalZoom or other Internet service providers.

“At the last meeting of the Legislative Advisory Committee we asked that the committee allow us to present an alternative to House Bill 436 at the next meeting,” Schaaf said, “which is Feb. 15, to consider and share with other sections and hopefully be in a position to support that alternative bill instead of House Bill 436.

“Secondly, we also asked that bar leadership engage the membership in a dialogue about this issue in some kind of forum, whether that be an open meeting or an open call where the membership at-large could provide feedback to bar association leadership on this issue. We have time before the General Assembly reconvenes next spring.”

The section, Schaaf added, is unique in that it employs a consumer protection attorney.

“A portion of each section member’s dues to the Real Property Section goes to pay the fees of that consumer protection attorney,” Schaaf said. “At each council meeting we always discuss consumer protection issues, in particular unauthorized operators in the state who are practicing law without a license.

“Those issues have arisen in many cases in recent years with, for example, notaries who go out and close refinance transactions when they’re not licensed attorneys. Another example are ‘settlement services’ that attempt to close residential loans even though there is no attorney connected with that service.”

The section has also closely monitored proceedings involving LegalZoom and the State Bar.

“In August of 2014 we were first informed that the State Bar may be trying to settle the litigation with LegalZoom, so we were trying to find out what that would mean and what the settlement details would be,” Schaaf said. “That is when we anticipated some changes to Chapter 84 regulating the practice of law.

“Like all the other sections, we did not see any particular language until October 2015 when the settlement with the State Bar was reached and the State Bar asked if the Bar Association would support the settlement.”

The section, Schaaf said, does not believe the legislation goes far enough in protecting consumers.

“Primarily our members are concerned that the settlement bill, House Bill 436, is not sufficient to protect consumers in North Carolina,” Schaaf said. “In our view, the State Bar should not have settled the ongoing litigation based on that legislation because it does not address many of the concerns that we’ve heard in the past about LegalZoom and other third-party providers, and concerns that we’ve heard during this debate.”

Schaaf summarized his section’s concerns as follows:

Under House Bill 436, a North Carolina licensed attorney is required to review each form that is provided by the third-party provider, but there is no basis to think that an attorney-client relationship is created with that attorney and no basis to think that anyone using the provider could therefore have recourse if there was malpractice or the services were deficient in some respect.

The fact that a consumer is allowed to view an online legal document in its entirety is really meaningless as a protective device for the consumer because the consumer is not going to understand what they are reviewing.

The bill requires LegalZoom or the third-party service provider to say they may want to consult directly with an attorney. Unfortunately that provision is going to add little or no protective effect to the consumer while it may in fact protect the third-party provider from liability.

One provision that was stripped from the bill last year that would have provided some oversight by the attorney general was taken out during the legislative process, so unfortunately that made the bill materially worse from a consumer protection standpoint.

The settlement was obviously geared toward LegalZoom, because of the ongoing litigation with the State Bar, but it is not specific to LegalZoom and it therefore opens the door for any other third-party form or service provider to come in to the state of North Carolina to provide these services. We will be allowing operators to provide legal services to consumers who are not as high profile as LegalZoom and who are even less reputable.

The Real Property Section is also concerned about the impact the settlement will have on its members and others within the legal profession who have provided the services that in many instances may be replaced by online providers.

“Generally,” Schaaf said, “this has a potential to really affect practitioners, particularly general practitioners, and in small towns and other rural areas, because LegalZoom is going to provide estate planning services, property services, family law services and other similar day-in and day-out services for consumers.

“We see that affecting a lot of our members who are in the residential real estate area or other areas in a general practice.”

The Real Property Section, Schaaf continued, has not been swayed by arguments often made in support of LegalZoom and other third-party providers.

“One argument we have heard over and over is that North Carolina is the last state that is not authorizing LegalZoom to operate and therefore we need to get with the program and let them do it,” Schaaf said. “Frankly that is not a good enough reason for us to do it in North Carolina.

“Another argument we have heard is we can’t stop technology from operating in the legal field and that is certainly true. But that does not mean we forget that we have a duty to consumers in North Carolina to protect them from getting bad legal advice by allowing these operators within the state.”

The section, Schaaf concluded, appreciates the fact that the NCBA must speak with one voice at the General Assembly on this and other matters impacting the legal profession.

“However, we certainly objected to the settlement and did not want the Bar Association leadership to support the settlement,” Schaaf said, “especially given that it was not supported by a portion of our membership, not just within the Real Property Section, but also in other sections.

“Although everyone who is involved with our Section council understands that these are difficult issues and that no one loves this settlement, some attorneys within the Bar are making the case that this is the best we can do. Our section disagrees with that approach and would rather that the State Bar take its chances with a decision with the N.C. Business Court.”

Russell Rawlings is Communications Director for the North Carolina Bar Association.

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